Saturday, 21 July 2012

E-Commerce in the UAE: Part 4

This is the last of a multi-part blog post on my views on E-Commerce in the UAE.  To read the earlier parts click below:

Whatever thoughts I have on this topic are my own.  They aren’t to be linked to my company or anyone else so if quoting me, please don’t quote me in my professional capacity as this has been written in my personal capacity.

Installment 4: Sustainability of an E-Commerce Business

Sustainability.  A simple word that often gets neglected by most entrepreneurs when building a business.  What sounds like a great idea today, also has to be a great idea tomorrow and the day after that.  In order for it to be a great idea, it also needs to be cash positive and profitable without getting carried away.  Even though as a budding entrepreneur you’re looking to be disruptive in your own way within your own industry, some of the fundamentals of business haven’t changed and you need to recognize that.  Some of this can be done on your own and some of it may require having the right supporting tools along the way available to you.

I’ll highlight a few factors that most e-commerce businesses need to look at uniquely in this region as trying to simply replicate what works elsewhere may not always work here.

Accepting a credit card over the Internet is risky.  It is risky for the cardholder but it’s more risky for the merchant or e-commerce retailer.  Firstly, the rates that most credit card acquirers charge for online transactions is in most cases significantly higher than those charged for retail-type swipe transactions.  The fact that a credit card isn’t in front of you means there are more chances of fraud in the eyes of most acquiring banks.  For most e-commerce retailers, they need to factor in these costs into their cost of sales because in some cases, it may end up that the cost of doing business online is actually more expensive than selling in a physical store.  
If you’re dealing with a local UAE-based acquiring bank, you typically also hear that their rates are higher than that being charged by overseas acquiring banks.  If you don’t have volume, then trying to negotiate a rate is going to be difficult.  Even a lot of the e-commerce players that you see operating in the UAE, use third-party payment gateways based outside the UAE because they work out cheaper (albeit in most cases, they’re still more expensive than retailers pay acquiring banks for swiping cards in their stores).
From a security point of view, the moment you accept a credit card, you are at risk as a merchant.  Most credit card agreements state that the cardholder has got a period of 12-18 months to dispute a claim and even when you’re 101% sure that the claim is fraudulent, the bank will in many cases side with the cardholder.  After all, “the customer is always right,” isn’t he and when was the last time a bank sided with you?
In such cases, you may be liable for a chargeback.  That means, you lose the money and if the good or service has been shipped or availed, you lose even more because there is that cost that is also likely to go out of your pocket.
Merchant beware.
There are companies that can help verify the authenticity of online transactions but again this comes at a cost. 
The bigger risk though is that if you’re shipping outside of your legal jurisdiction as there is very little legal recourse.  For example, if you are an e-tailer based in the UAE and you ship a product to a customer in Saudi Arabia, if he turns around a year later to dispute the claim and you know he’s lying, there is little you can do.  He isn’t in the same country as you and there is no court that can help you in this case.  If the transaction happened with a customer sitting in the UAE, then there is still the chance that the legal system assist can you.
A lot of these are issues that aren’t as much of a concern for a retailer who is based in the United States and ships within the United States because for them, there is always legal recourse, even across State lines.
Cash on Delivery is always an option but in an age of instant gratification, there’s nothing like knowing you’ve placed your oder, committed yourself and preparing yourself to benefit from the service or good you’ve ordered.

Having discussed in a previous installment about the strength of retailing in the UAE, the role of logistics becomes that much more critical.  If you’re going to charge a delivery fee, then this is an additional cost to the customer, if you absorb the delivery fee, it’s an additional cost of sale on you as an e-commerce retailer.  In the long term, you need to see how you manage this.

What is more crucial though is how are you going to differentiate yourself logistically as price alone isn’t a grounds to compete on.  Even if you’re product is Dhs. 100 cheaper than a retail store but if it takes 24-48 hours to receive the product and I have a mall five minutes away from me, I may still be willing to buy the product from a retail outlet.  Same day delivery, same afternoon delivery, express delivery are all concepts that many e-commerce retailers in the region are going to have to adopt.  This though costs money and you need to see how you manage to fit this into your operating model.
Act Local, Think Global

On the Internet, the competition is Global.  Even if you’ve got a fantastic selling proposition when compared to local e-commerce players and retailers, you need to not lose sight of the bigger picture.  This applies not only to how you price your product but the overall experience you provide the customer, whether it be your website design, mobile experience, social media strategy, etc.  You have to be top class to compete with global players.
From a pricing point of view, you need to keep in mind the global price situation as well.  Just because you’re cheaper than a local retailer who buys his product at an exorbitant price from a local authorized agent doesn’t mean you’re necessarily competitive if an international website is still cheaper than you. 
Know When to Say Stop!

This ties back to the initial word I mentioned, sustainability.  In an effort to put all the bells and whistles onto a website, we tend to lost sight of the fact that the Internet is the greatest source of information out there.  Sometimes, there are aways of getting things done cheaper without doing it all yourself.  Maybe in the pursuit for perfection, you run over budget and time frames.  There is no point in having the best online resource if there isn’t business to justify the costs of developing it.  
Stand out from the Crowd

How many group buying or coupon sites are there out there?  How do you stand out from the crowd and provide a value proposition that stands out not only to your customers but your investors as well? How many group buying or coupon sites do you know of in the UAE?  Will all of them succeed? Loyalty is difficult to come by but shoppers are actually more loyal online than we give them credit for.  
From my own personal experience, I know I’ve used Expedia or Amazon to book hotels or buy books without looking at the alternatives.  Even when I know there are alternatives that are cheaper, I’ve still continued to use these websites because there is a level of confidence I’ve developed with them and don’t mind paying a premium in these cases.  There are some local e-tailers who’ve started gaining the same trust from their customer.  Whether they’ve done it with service, responsiveness or logistical advantages, they’ve managed to shift the conversation away from price at times and get away with charging more than traditional retailers do at times.
Revenue Stream

How often have you heard someone talk of a great idea and then realize there is little or no revenue stream?  Worse still, how many people have spoken of revenue streams that seem completely unrealistic.  At the end of the day, money talks.
Economies of Scale

If you do have an idea, you need to ask yourself if it is scalable.  Scalable in two senses: one is can you grow within a budget that makes sense and secondly, is there a big enough market for it so you have enough volume generated to make a profit.  Remember, this isn’t the United States or Europe where there are millions of consumers who can potentially buy from you.
Concluding Thoughts To E-Commerce in the UAE

For any business to succeed, it needs enough volume at the right price.  If this doesn’t happen, you’re fighting a battle before you’ve even started.  As excited as we get about the UAE, we need to assess the fact whether we indeed have the critical mass.  For a retailer, hotelier, restauranteur or airline, there is always a tourist population to fall back on.  For an e-commerce retailer that only serves the UAE population, there is a much smaller population that makes up your total potential market size.  If you decide to work outside the UAE as well, then you need to see whether you’ve protected yourself legally and if you’re business is scalable at a cost that makes sense across more than one geography.
The fact is that the UAE is a unique market.  A textbook approach will not work in this part of the world.  There is a growing retail and e-tail market.  Whichever way you look, you can’t avoid it.  How it grows, who grows it best and what models adapt themselves best to the UAE is something we will see.  I know of a few e-commerce players who seem to have their game hat on and are talking the right language and many more who are talking in general terms but look to have missed the boat fundamentally.  The same goes with retailers.  Many have grown aware of the fact that they need to recognize e-tailing however, some have understood better than others how to adopt it into their business.  If retail grows, it is not necessarily at the cost of e-commerce and vice-versa, e-commerce may grow in the region not at the cost of retail but because the number of opportunities that exist have increased overall.
In the meantime, there are a lot of consultants out there who are making a lot of money from this.  Some of them doing it justifiably as they know what’s happening but again like in any business, it’s a case of buyer beware.  The consultant you’re hiring may not more much more than you.
I hope you’ve enjoyed this read on my thoughts on the e-commerce space in the UAE.  As I mentioned earlier, you may or may not agree with a lot of what I said.  I’d be happy to hear your thoughts as well but do appreciate the fact that this is an opinion piece and I don’t expect everyone to agree with everything I’ve said.